GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1)
Nature of business and summary of significant accounting policies
Nature of Business
– We are
a financial services company committed to finding new ways of disrupting and transforming the life insurance and related industries.
We built our business by creating opportunities for consumers to obtain significantly more value for their life insurance policies
as compared to the traditional options offered by the insurance industry by creating a secondary market. We are enhancing and
extending these activities through innovation in our products and services, business processes, financing strategies, and advanced
epigenetic technologies. At the same time, we are creating opportunities for investors to receive income and capital appreciation
from our investment activities in the life insurance and related industries.
GWG
Holdings, Inc. and all of its subsidiaries are incorporated and organized in Delaware. Unless the context otherwise requires or
we specifically so indicate, all references in these footnotes to “we,” “us,” “our,” “our
Company,” “GWG,” or the “Company” refer to GWG Holdings, Inc. and its subsidiaries collectively
and on a consolidated basis. References to the full names of particular entities, such as “GWG Holdings, Inc.” or
“GWG Holdings,” are meant to refer only to the particular entity referenced.
On September 30, 2015, GWG Holdings formed
a wholly owned subsidiary, Wirth Park Agency, LLC. Wirth Park Agency was formed to transact life insurance policy sales on behalf
of life insurance agents.
On December 7, 2015, GWG Holdings formed
a wholly owned subsidiary, GWG MCA, LLC. On January 13, 2016, GWG MCA, LLC was converted to a corporation and became GWG MCA Capital,
Inc. GWG MCA Capital, Inc. was formed to provide cash advances to small businesses.
On August 25, 2016, GWG Holdings formed
a wholly owned subsidiary, Actüa Life & Annuity Ltd., to engage in various life insurance related businesses and activities
related to its exclusive license for “DNA Methylation Based Predictor of Mortality” technology.
Use of Estimates
– The preparation
of our consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions affecting
the reported amounts of assets and liabilities at the date of the consolidated financial statements, as well as the reported amounts
of revenue during the reporting period. We regularly evaluate estimates and assumptions, which are based on current facts, historical
experience, and various other factors that we believe to be reasonable under the circumstances. Our actual results may differ materially
and adversely from our estimates. The most significant estimates with regard to these consolidated financial statements relate
to (1) the determination of the assumptions used in estimating the fair value of our investments in life insurance policies, and
(2) the value of our deferred tax assets and liabilities.
Cash
and Cash Equivalents
– We consider cash in demand deposit accounts and temporary investments purchased with an original
maturity of three months or less to be cash equivalents. We maintain our cash and cash equivalents with highly rated financial
institutions. The balances in our bank accounts may exceed Federal Deposit Insurance Corporation limits. We periodically evaluate
the risk of exceeding insured levels and may transfer funds as we deem appropriate.
Life Insurance Policies
– ASC
325-30 permits a reporting entity to account for its investments in life insurance policies using either the investment method
or the fair value method. We elected to use the fair value method to account for our life insurance policies. We initially record
our purchase of life insurance policies at the transaction price, which is the amount paid for the policy, inclusive of all external
fees and costs associated with the acquisition. At each subsequent reporting period, we re-measure the investment at fair value
in its entirety and recognize the change in fair value as unrealized gain (revenue) in the current period, net of premiums paid.
In a case where our acquisition of a policy is not complete as of a reporting date, but we have nonetheless
advanced direct costs and deposits for the acquisition, those costs and deposits are recorded as “other assets” on
our balance sheet until the acquisition is complete and we have secured title to the policy. On both March 31, 2017 and December
31, 2016, a total of $42,000 of our “other assets” comprised direct costs and deposits that we advanced for policy
acquisitions.
We also recognize realized gain (or loss) from
a life insurance policy upon one of the two following events: (1) our receipt of notice or verified mortality of the insured; or
(2) our sale of the policy, filing of change-of-ownership forms and receipt of payment. In the case of mortality, the gain (or
loss) we recognize is the difference between the policy benefits and the carrying values of the policy once we determine that collection
of the policy benefits is realizable and reasonably assured. In the case of a policy sale, the gain (or loss) we recognize is the
difference between the sale price and the carrying value of the policy on the date we receive sale proceeds.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Other Assets
– Actüa
Life & Annuity Ltd. (“Actüa”) is a wholly owned subsidiary of GWG Holdings engaged in various life insurance
businesses and activities related to its exclusive license for the “DNA Methylation Based Predictor of Mortality”
technology for the life insurance industry. The cost of entering into this license agreement is listed as “other assets.”
Stock-Based Compensation
: We measure
and recognize compensation expense for all stock-based payments at fair value over the requisite service period. We use the Black-Scholes
option pricing model to determine the weighted-average fair value of options. For restricted stock grants, fair value is determined
as of the closing price of our common stock on the date of grant. Stock-based compensation expense is recorded in general and administrative
expenses based on the classification of the employee or vendor. The determination of fair value of stock-based payment awards on
the date of grant using an option-pricing model is affected by our stock price as well as by assumptions regarding a number of
subjective variables. These variables include, but are not limited to, the expected stock price volatility over the term of the
awards, and actual and projected employee stock option exercise behaviors.
The expected terms of the options are
based on evaluations of historical and expected future employee exercise behavior. The risk-free interest rate is based on the
U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected life at grant date. Volatility
is based on the standard deviation of the average continuously compounded rate of return of five selected comparable companies
over the previous 52 weeks. We have not historically issued any common stock dividends and do not expect to do so in the foreseeable
future. Forfeitures for both option and restricted stock grants are estimated at the time of the grant and revised in subsequent
periods if actual forfeitures differ from estimates.
Deferred Financing and Issuance Costs
– Loans advanced to us under our senior credit facilities, as described in Notes 5 and 6, are reported net of financing
costs, including issuance costs, sales commissions and other direct expenses, which are amortized using the straight-line method
over the term of the facility. The Series I Secured Notes and L Bonds, as respectively described in Notes 7 and 8, are
reported net of financing costs, which are amortized using the interest method over the term of those borrowings. The Series A,
as described in Note 9, is reported net of financing costs (including the fair value of warrants issued), all of which were fully
amortized using the interest method as of March 31, 2017. Selling and issuance costs of Redeemable Preferred Stock (“RPS”)
and Series 2 Redeemable Preferred Stock (“RPS 2”), described in Notes 10 and 11, are netted against additional paid-in-capital.
Earnings
(loss) per Share
– Basic earnings (loss) per share attributable to common shareholders are calculated using the weighted-average
number of shares outstanding during the reported period. Diluted earnings (loss) per share are calculated based on the potential
dilutive impact of our outstanding Series A, RPS, warrants and stock options. Due to our net loss for the three months ended March
31, 2017, there are no dilutive securities.
Recently Issued Accounting Pronouncements
–
On April 7, 2015, the FASB issued Accounting Standards Update No. 2015-03,
Simplifying
the Presentation of Debt Issuance Costs
(“ASU 2015-03”), as part of its simplification initiative. ASU 2015-03
changes the presentation of debt issuance costs by presenting those costs in the balance sheet as a direct deduction from the related
debt liability. Amortization of the costs is reported as interest expense. We
adopted ASU 2015-03 effective January 1, 2016,
as required for public reporting entities.
On February 25, 2016, the FASB issued ASU
2016-02
Leases
(“ASU 2016-02”). The new guidance is effective for fiscal years beginning after December 15,
2018. ASU 2016-02 provides more transparency and comparability in the financial statements of lessees by recognizing all leases
with a term greater than twelve months on the balance sheet. Lessees will also be required to disclose key information about their
leases. Early adoption is permitted. We are currently evaluating the impact of the adoption of this pronouncement and have not
yet adopted ASU 2016-02 as of March 31, 2017.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(2)
Restrictions on cash
Under
the terms of our senior credit facilities (discussed in Notes 5 and 6), we are required to maintain collection and escrow accounts
that are used to fund the acquisition of policies, pay annual policy premiums, pay interest and other charges under the facility,
and collect policy benefits. The agents for the lenders authorize the disbursements from these accounts. At March 31, 2017 and
December 31, 2016, there was a balance of $48,092,000, and $37,827,000, respectively, in these restricted cash accounts.
(3)
Investment in life insurance policies
Life insurance policies are valued based
on unobservable inputs that are significant to their overall fair value. Changes in the fair value of these policies are recorded
as gain or loss on life insurance policies, net of premiums paid on those policies, in our consolidated statements of operations.
Fair value is determined on a discounted cash flow basis that incorporates life expectancy assumptions generally derived from
reports obtained from widely accepted life expectancy providers, other than insured lives covered under small face amount policies
(i.e., $1 million in face value benefits or less), assumptions relating to cost-of-insurance (premium) rates and other assumptions.
The discount rate we apply incorporates current information about discount rate applied by other reporting companies owning portfolios
of life insurance policies, the discount rates observed in the life insurance secondary market, market interest rates, the credit
exposure to the insurance companies that issued the life insurance policies and management’s estimate of the risk premium
a purchaser would require to receive the future cash flows derived from our portfolio as a whole. As a result of management’s
analysis, a discount rate of 10.96% was applied to our portfolio as of both March 31, 2017 and December 31, 2016.
A
summary of our life insurance policies accounted for under the fair value method, and their estimated maturity
dates, based on remaining life expectancy is as follows:
|
|
As of March 31, 2017
|
|
|
As of December 31, 2016
|
|
Years Ending December 31,
|
|
Number of Contracts
|
|
|
Estimated Fair Value
|
|
|
Face Value
|
|
|
Number of Contracts
|
|
|
Estimated Fair Value
|
|
|
Face Value
|
|
2017
|
|
|
6
|
|
|
|
3,861,000
|
|
|
|
4,375,000
|
|
|
|
11
|
|
|
|
14,837,000
|
|
|
|
16,939,000
|
|
2018
|
|
|
19
|
|
|
|
27,200,000
|
|
|
|
35,893,000
|
|
|
|
23
|
|
|
|
30,830,000
|
|
|
|
42,564,000
|
|
2019
|
|
|
70
|
|
|
|
74,557,000
|
|
|
|
112,510,000
|
|
|
|
55
|
|
|
|
57,556,000
|
|
|
|
88,858,000
|
|
2020
|
|
|
87
|
|
|
|
79,279,000
|
|
|
|
143,812,000
|
|
|
|
93
|
|
|
|
85,414,000
|
|
|
|
159,814,000
|
|
2021
|
|
|
91
|
|
|
|
80,357,000
|
|
|
|
166,349,000
|
|
|
|
86
|
|
|
|
73,825,000
|
|
|
|
158,744,000
|
|
2022
|
|
|
74
|
|
|
|
62,786,000
|
|
|
|
153,016,000
|
|
|
|
66
|
|
|
|
56,909,000
|
|
|
|
147,222,000
|
|
2023
|
|
|
72
|
|
|
|
49,018,000
|
|
|
|
142,501,000
|
|
|
|
64
|
|
|
|
44,953,000
|
|
|
|
128,581,000
|
|
Thereafter
|
|
|
334
|
|
|
|
168,339,000
|
|
|
|
689,102,000
|
|
|
|
292
|
|
|
|
146,868,000
|
|
|
|
618,953,000
|
|
Totals
|
|
|
753
|
|
|
$
|
545,397,000
|
|
|
$
|
1,447,558,000
|
|
|
|
690
|
|
|
$
|
511,192,000
|
|
|
|
1,361,675,000
|
|
We
recognized life insurance benefits of $18,975,000 and $19,238,000 during the three months ended March 31, 2017 and 2016, respectively,
related to policies with a carrying value of $2,369,000 and $4,611,000, respectively, and as a result recorded realized gains
of $16,606,000 and $14,627,000, respectively.
Reconciliation of gain on life insurance policies:
Three Months Ended:
|
|
March 31,
2017
|
|
|
March 31,
2016
|
|
Change in fair value
|
|
$
|
13,884,000
|
|
|
$
|
11,532,000
|
|
Premiums and other annual fees
|
|
|
(11,090,000
|
)
|
|
|
(8,445,000
|
)
|
Policy maturities
|
|
|
16,606,000
|
|
|
|
14,627,000
|
|
Gain on life settlements, net
|
|
$
|
19,400,000
|
|
|
$
|
17,714,000
|
|
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
We
currently estimate that premium payments and servicing fees required to maintain our current portfolio of life insurance policies
in force for the next five years, assuming no mortalities, are as follows:
Years Ending December 31,
|
|
Premiums
|
|
|
Servicing
|
|
|
Premiums and
Servicing Fees
|
|
Nine months ending December 31, 2017
|
|
$
|
35,228,000
|
|
|
$
|
654,000
|
|
|
$
|
35,882,000
|
|
2018
|
|
|
51,895,000
|
|
|
|
654,000
|
|
|
|
52,549,000
|
|
2019
|
|
|
57,632,000
|
|
|
|
654,000
|
|
|
|
58,286,000
|
|
2020
|
|
|
62,464,000
|
|
|
|
654,000
|
|
|
|
63,118,000
|
|
2021
|
|
|
70,222,000
|
|
|
|
654,000
|
|
|
|
70,876,000
|
|
2022
|
|
|
78,953,000
|
|
|
|
654,000
|
|
|
|
79,607,000
|
|
|
|
$
|
356,394,000
|
|
|
$
|
3,924,000
|
|
|
$
|
360,318,000
|
|
Management
anticipates funding the premium payments estimated above with proceeds from the receipt of policy benefits from our portfolio
of life insurance policies, net proceeds from our offering of L Bonds and RPS 2, and from our senior credit facilities. The proceeds
of these capital sources may also be used for the purchase, financing, and maintenance of additional life insurance policies.
(4)
Fair value definition and hierarchy
ASC 820 establishes a hierarchical disclosure
framework that prioritizes and ranks the level of market price observability used in measuring assets and liabilities at fair value.
Market price observability is affected by a number of factors, including the type of investment, the characteristics specific to
the investment and the state of the marketplace, including the existence and transparency of transactions between market participants.
Assets and liabilities with readily available and actively quoted prices, or for which fair value can be measured from actively
quoted prices in an orderly market, generally will have a higher degree of market price observability and a lesser degree of judgment
used in measuring fair value. ASC 820 maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring
the use of observable inputs whenever available. Observable inputs are inputs that market participants would use in pricing the
asset or liability developed based on market data obtained from independent sources. Unobservable inputs are inputs that reflect
assumptions about how market participants price an asset or liability based on the best available information. Fair value is defined
as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an
orderly transaction between market participants at the measurement date.
The
hierarchy is broken down into three levels based on the observability of inputs as follows:
●
|
Level 1 - Valuations based on quoted prices in active markets for identical assets or liabilities that we
have the ability to access. Since valuations are based on quoted prices that are readily and regularly available in an active market,
valuation of these products does not entail a significant degree of judgment.
|
●
|
Level
2 - Valuations based on one or more quoted prices in markets that are not active or for which all significant inputs are observable,
either directly or indirectly.
|
●
|
Level
3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
|
The
availability of observable inputs can vary by types of assets and liabilities and is affected by a wide variety of factors, including,
for example, whether an instrument is established in the marketplace, the liquidity of markets and other characteristics particular
to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the
market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by management in
determining fair value is greatest for assets and liabilities categorized in Level 3.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Level 3
Valuation Process
The
estimated fair value of our portfolio of life insurance policies is determined on a quarterly basis by our portfolio management
committee, taking into consideration changes in discount rate assumptions, estimated premium payments and life expectancy estimate
assumptions, as well as any changes in economic and other relevant conditions. The discount rate incorporates current information
about discount rate applied by other reporting companies owning portfolios of life insurance policies, the discount rates observed
in the life insurance secondary market, market interest rates, the credit exposure to the insurance company that issued the life
insurance policy and management’s estimate of the risk premium a purchaser would require to receive the future cash flows
derived from our portfolio as a whole.
These
inputs are then used to estimate the discounted cash flows from the portfolio using the Model Actuarial Pricing System probabilistic
portfolio price model, which estimates the cash flows using various mortality probabilities and scenarios. The valuation process
includes a review by senior management as of each valuation date. We also engage a third-party expert to independently test the
accuracy of the valuations using the inputs we provide on a quarterly basis. See Exhibit 99.1 filed herewith.
The
following table reconciles the beginning and ending fair value of our Level 3 investments in our portfolio of life insurance policies
for the periods ended March 31, as follows:
|
|
Three Months Ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Beginning balance
|
|
$
|
511,192,000
|
|
|
$
|
356,650,000
|
|
Purchases
|
|
|
22,690,000
|
|
|
|
23,831,000
|
|
Maturities (initial cost basis)
|
|
|
(2,369,000
|
)
|
|
|
(4,611,000
|
)
|
Net change in fair value
|
|
|
13,884,000
|
|
|
|
11,532,000
|
|
Ending balance
|
|
$
|
545,397,000
|
|
|
$
|
387,402,000
|
|
In
the past, we periodically updated the independent life expectancy estimates on the insured lives in our portfolio, other than
insured lives covered under small face amount policies (i.e., $1 million in face value benefits or less), on a continuous rotating
three-year cycle, and through that effort attempted to update life expectancies for approximately one-twelfth of our portfolio
each quarter. Currently, however, the terms of our senior credit facility with LNV Corporation require us to attempt to update
life expectancies on a rotating two-year cycle.
The
following table summarizes the inputs utilized in estimating the fair value of our portfolio of life insurance policies:
|
|
As of
March 31,
2017
|
|
|
As of
December 31,
2016
|
|
Weighted-average age of insured, years
|
|
|
81.5
|
|
|
|
81.6
|
|
Weighted-average life expectancy, months
|
|
|
83.0
|
|
|
|
83.2
|
|
Average face amount per policy
|
|
$
|
1,922,000
|
|
|
$
|
1,973,000
|
|
Discount rate
|
|
|
10.96
|
%
|
|
|
10.96
|
%
|
These
assumptions are, by their nature, inherently uncertain and the effect of changes in estimates may be significant. For example,
if the life expectancy estimates were increased or decreased by four and eight months on each outstanding policy, and the
discount rates were increased or decreased by 1% and 2%, while all other variables were held constant, the fair value of our investment
in life insurance policies would increase or (decrease) as summarized below:
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Change
in Fair Value of the Investment in Life Insurance Policies
|
|
Change in life expectancy estimates
|
|
|
|
minus 8 months
|
|
|
minus 4 months
|
|
|
plus 4 months
|
|
|
plus 8 months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
$
|
74,249,000
|
|
|
$
|
36,972,000
|
|
|
$
|
(36,277,000
|
)
|
|
$
|
(71,802,000
|
)
|
December 31, 2016
|
|
$
|
69,253,000
|
|
|
$
|
34,601,000
|
|
|
$
|
(33,846,000
|
)
|
|
$
|
(67,028,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in discount rate
|
|
|
|
|
minus 2%
|
|
|
|
minus 1%
|
|
|
|
plus 1%
|
|
|
|
plus 2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
$
|
57,001,000
|
|
|
$
|
27,278,000
|
|
|
$
|
(25,096,000
|
)
|
|
$
|
(48,239,000
|
)
|
December 31, 2016
|
|
$
|
53,764,000
|
|
|
$
|
25,728,000
|
|
|
$
|
(23,668,000
|
)
|
|
$
|
(45,491,000
|
)
|
Other
Fair Value Considerations
The carrying value of receivables, prepaid
expenses, accounts payable and accrued expenses approximate fair value due to their short-term maturities and low credit risk.
Using the income-based valuation approach, the estimated fair value of our Series I Secured Notes and L Bonds, having a combined
aggregate face value of $402,500,000 as of March 31, 2017, is approximately $413,074,000 based on a weighted-average market interest
rate of 6.55%. The carrying value of the senior credit facilities reflects interest charged at the commercial paper rate or 12-month
LIBOR, as applicable, plus an applicable margin. The margin represents our credit risk, and the strength of the portfolio of life
insurance policies collateralizing the debt. The overall rate reflects market, and the carrying value of the facility approximates
fair value.
GWG
MCA participates in the merchant cash advance industry by directly advancing sums to merchants and lending money, on a secured
basis, to companies that advance sums to merchants. Each quarter, we review the carrying value of these advances and loans, and
determine if an impairment reserve is necessary. At March 31, 2017 one of our secured loans was potentially impaired. The secured
loan to Nulook Capital LLC had an outstanding balance of $2,105,000 and a loan loss reserve of $600,000 at March 31, 2017.
We deem fair value to be the estimated collectible value on each loan or advance made from GWG MCA. Where we estimate the collectible
amount to be less than the outstanding balance, we record a reserve for the difference.
The
following table summarizes outstanding warrants as of March 31, 2017:
Month issued
|
|
Warrants issued
|
|
|
Fair value per share
|
|
|
Risk free rate
|
|
|
Volatility
|
|
|
Term
|
|
June 2012
|
|
|
161,840
|
|
|
$
|
1.16
|
|
|
|
0.41
|
%
|
|
|
47.36
|
%
|
|
|
5 years
|
|
July 2012
|
|
|
144,547
|
|
|
$
|
1.16
|
|
|
|
0.41
|
%
|
|
|
47.36
|
%
|
|
|
5 years
|
|
September 2012
|
|
|
2,500
|
|
|
$
|
0.72
|
|
|
|
0.31
|
%
|
|
|
40.49
|
%
|
|
|
5 years
|
|
September 2014
|
|
|
16,000
|
|
|
$
|
1.26
|
|
|
|
1.85
|
%
|
|
|
17.03
|
%
|
|
|
5 years
|
|
|
|
|
324,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5)
Credit Facility – Autobahn Funding Company LLC
Through GWG DLP Funding III, LLC (“DLP III”) we are
party to a $105 million senior credit facility with Autobahn Funding Company LLC (“Autobahn”), with a maturity date
of June 30, 2018. The facility is governed by a Credit and Security Agreement (the “Agreement”), and DZ Bank AG Deutsche
Zentral-Genossenschaftsbank (“DZ Bank”) acts as the agent for Autobahn under the Agreement. On September 14, 2016,
we paid off this senior credit facility in full with funds received from a new senior credit facility with LNV Corporation as
described in Note 6.
Advances
under the facility bear interest at a commercial paper rate of the lender at the time of the advance, or at the lender’s
cost of borrowing plus 4.25%.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The amount outstanding under this facility was
$0 at both March 31, 2017 and December 31, 2016, respectively. GWG Holdings is a performance guarantor of the various obligations
of GWG Life, as servicer, under the Agreement. Obligations under the facility are secured by our pledge of ownership in our life
insurance policies to DZ Bank through an arrangement under which Wells Fargo serves as securities intermediary.
The
Agreement has certain financial (as described below) and non-financial covenants, and we were in compliance with these
covenants at both March 31, 2017 and December 31, 2016.
We
have agreed to maintain (i) a positive consolidated net income on a non-GAAP basis (as defined and calculated under the Agreement)
for each complete fiscal year, (ii) a tangible net worth on a non-GAAP basis (again, as defined and calculated under the Agreement)
of not less than $45 million, and (iii) cash and eligible investments of $15 million or above.
Consolidated non-GAAP net
income and non-GAAP tangible net worth for the four quarters ended and as of March 31, 2017, as calculated under the Agreement,
was $28,710,000 and $192,518,000, respectively.
No life insurance policies were pledged
and no funds were available for additional borrowings under the facility at March 31, 2017 and December 31, 2016.
(6) Credit Facility – LNV Corporation
On
September 14, 2016, we entered into a senior credit facility with LNV Corporation as lender through our subsidiary GWG DLP Funding
IV, LLC (“DLP IV”). The facility is governed by a Loan and Security Agreement (the “Loan Agreement”),
with CLMG Corp. acting as administrative agent on behalf of the lenders under the Loan Agreement. The Loan Agreement makes available
a total of up to $172,300,000 in credit with a maturity date of September 14, 2026. Additional quarterly advances are available
under the Loan Agreement at the LIBOR rate as defined in the agreement. Interest will accrue on amounts borrowed under the agreement
at an annual interest rate, determined as of each date of borrowing or quarterly if there is no borrowing, equal to (A) the greater
of 12-month LIBOR or the federal funds rate (as defined in the agreement) plus one-half of one percent per annum, plus (B) 5.75%
per annum. Interest payments are made on a quarterly basis.
The
amount outstanding under this facility was $159,470,000 at March 31, 2017. Obligations under the facility are secured by a security
interest in DLP IV’s assets, for the benefit of the lenders under the Loan Agreement, through an arrangement under which
Wells Fargo serves as securities intermediary. The life insurance policies owned by DLP IV do not serve as direct collateral for
the obligations of GWG Holdings under its L Bonds or Series I Secured Notes. The difference between the outstanding balance as
of March 31, 2017 and the carrying amount relates to unamortized debt issuance costs.
The Loan Agreement requires DLP IV to maintain
a reserve account in an amount sufficient to pay 12 months of servicing, administrative and third party expenses identified under
the Loan Agreement, and 12 months of debt service as calculated under the Loan Agreement. As of March 31, 2017, the amount set
aside in this specific reserve account was $27,504,000.
The
Agreement has certain financial and nonfinancial covenants, and we were in compliance with these covenants at March 31, 2017 and
December 31, 2016.
No funds were available for additional borrowings under the facility at March 31, 2017.
(7)
Series I Secured Notes
Series
I Secured Notes (“Series I”) are legal obligations of GWG Life and were privately offered and sold from August 2009
through June 2011. The Series I are secured by the assets of GWG Life and are subordinate to obligations under our senior credit
facilities (see Notes 5 and 6). We are party to a Third Amended and Restated Note Issuance and Security Agreement dated November
1, 2011, as amended, under which GWG Life is obligor, GWG Holdings is guarantor, and Lord Securities Corporation serves as trustee
of the GWG Life Trust (“Trust”). This agreement contains certain financial and non-financial covenants, and we were
in compliance with these covenants at both March 31, 2017 and December 31, 2016.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The Series I were sold with original maturity
dates ranging from six months to seven years, and with fixed interest rates varying from 5.65% to 9.55% depending on the term
of the note. The Series I have renewal features under which we may elect to permit their renewal, subject to the right of noteholders
to elect to receive payment at maturity. Since September 1, 2016, we are no longer renewing the Series I.
Interest on the Series I is payable monthly,
quarterly, annually or at maturity depending on the election of the investor. At March 31, 2017 and December 31, 2016, the weighted-average
interest rate of our Series I was 8.82% and 8.68%, respectively. The principal amount of Series I outstanding was $10,629,000 and
$16,614,000 at March 31, 2017 and December 31, 2016, respectively. The difference between the amount outstanding on the Series
I and the carrying amount on our balance sheet is due to netting of unamortized deferred issuance costs and including redemptions
in process. Overall, interest expense includes amortization of deferred financing and issuance costs of $45,000 and $111,000 for
the three months ended March 31, 2017 and 2016, respectively. Future expected amortization of deferred financing costs is $163,000
in total over the next five years.
Future
contractual maturities of Series I payable, and future amortization of their deferred financing costs, at March 31, 2017 are as
follows:
Years Ending December 31,
|
|
Contractual Maturities
|
|
|
Amortization of Deferred Financing Costs
|
|
Nine months ending December 31, 2017
|
|
$
|
4,538,000
|
|
|
$
|
11,000
|
|
2018
|
|
|
2,401,000
|
|
|
|
34,000
|
|
2019
|
|
|
1,024,000
|
|
|
|
18,000
|
|
2020
|
|
|
1,725,000
|
|
|
|
48,000
|
|
2021
|
|
|
941,000
|
|
|
|
52,000
|
|
|
|
$
|
10,629,000
|
|
|
$
|
163,000
|
|
(8)
L Bonds
Our
L Bonds are legal obligations of GWG Holdings. Obligations under the L Bonds are secured by the assets of GWG Holdings and by
GWG Life, as a guarantor, and are subordinate to the obligations under our senior credit facilities (see Notes 5 and 6). We began
publicly offering and selling L Bonds in January 2012 under the name “Renewable Secured Debentures.” These debt securities
were re-named “L Bonds” in January 2015. L Bonds are publicly offered and sold on a continuous basis under a registration
statement permitting us to sell up to $1.0 billion in principal amount of L Bonds. We are party to an indenture governing the
L Bonds dated October 19, 2011, as amended (“Indenture”), under which GWG Holdings is obligor, GWG Life is guarantor,
and Bank of Utah serves as indenture trustee. The Indenture contains certain financial and non-financial covenants, and we were
in compliance with these covenants at March 31, 2017 and December 31, 2016.
Effective September 1, 2016, we ceased selling
6-month and 1-year L Bonds until further notice. In addition, effective September 1, 2016, the L Bond interest rates that we offer
changed to 5.50%, 6.25%, 7.50% and 8.50% for the 2-, 3-, 5- and 7-year L Bonds, respectively. The bonds have renewal features under
which we may elect to permit their renewal, subject to the right of bondholders to elect to receive payment at maturity. Interest
is payable monthly or annually depending on the election of the investor.
At March 31, 2017 and December 31, 2016, the
weighted-average interest rate of our L Bonds was 7.28% and 7.23%, respectively. The principal amount of L Bonds outstanding was
$391,871,000 and $387,067,000 at March 31, 2017 and December 31, 2016, respectively. The difference between the amount of outstanding
L Bonds and the carrying amount on our balance sheets is due to netting of unamortized deferred issuance costs and cash receipts
for new issuances and payments of redemptions in process. Amortization of deferred issuance costs was $1,929,000 and $1,568,000
for the three months ended March 31, 2017 and 2016, respectively. Future expected amortization of deferred financing costs as of
March 31, 2017 is $12,197,000 in total over the next seven years.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Future
contractual maturities of L Bonds, and future amortization of their deferred financing costs, at March 31, 2017 are as follows:
Years Ending December 31,
|
|
Contractual Maturities
|
|
|
Amortization of Deferred Financing Costs
|
|
Nine months ending December 31, 2017
|
|
$
|
70,454,000
|
|
|
$
|
670,000
|
|
2018
|
|
|
109,034,000
|
|
|
|
2,511,000
|
|
2019
|
|
|
103,420,000
|
|
|
|
3,643,000
|
|
2020
|
|
|
37,055,000
|
|
|
|
1,565,000
|
|
2021
|
|
|
28,901,000
|
|
|
|
1,438,000
|
|
Thereafter
|
|
|
43,007,000
|
|
|
|
2,370,000
|
|
|
|
$
|
391,871,000
|
|
|
$
|
12,197,000
|
|
(9)
Series A Convertible Preferred Stock
From
July 2011 until September 2012, we privately offered shares of Series A of GWG Holdings at $7.50 per share. In the offering, we
sold an aggregate of 3,278,000 shares for gross consideration of $24,582,000. Holders of Series A are entitled to cumulative dividends
at the rate of 10% per annum, paid quarterly. Dividends on the Series A are accumulating and are recorded as a reduction to additional
paid-in capital. Under certain circumstances described in the Certificate of Designation for the Series A, additional Series A
shares may be issued in lieu of cash dividends at the rate of $7.00 per share.
Holders
of Series A are entitled to a liquidation preference equal to the stated value of their preferred shares (i.e., $7.50 per share)
plus accrued but unpaid dividends. Holders of Series A may presently convert each share of their Series A into 0.75 shares of
our common stock at a price of $10.00 per share.
As
of March 31, 2017, we issued an aggregate of 497,000 shares of Series A in satisfaction of $3,481,000 in dividends on the Series
A, and an aggregate of 696,000 shares of Series A were converted into 522,000 shares of our common stock. As of March 31, 2017,
we had 2,652,000 Series A shares outstanding with respect to which we incurred aggregate issuance costs of $2,838,000, all
of which is included as a component of additional paid-in capital.
Purchasers
of Series A in our offering received warrants to purchase an aggregate of 431,954 shares of our common stock at an exercise
price of $12.50 per share. The grant date fair value of these warrants was $428,000. As of March 31, 2017, none of these
warrants had been exercised and 107,000 warrants have expired. The weighted-average remaining life of these warrants was
0.35 and 0.56 years at March 31, 2017 and December 31, 2016, respectively.
In September 2014, we completed, at our
discretion, a public offering of our common stock and, as a result, the Series A was reclassified from temporary equity to permanent
equity. We may redeem Series A shares at a price equal to 110% of their liquidation preference ($7.50 per share) at any time. As
of March 31, 2017, we have redeemed an aggregate of 435,365 shares of Series A.
(10)
Redeemable Preferred Stock
On
November 30, 2015, our public offering of up to 100,000 shares of Redeemable Preferred Stock (“RPS”) at $1,000 per
share was declared effective. Holders of RPS are entitled to cumulative dividends at the rate of 7% per annum, paid monthly. Dividends
on the RPS are recorded as a reduction to additional paid-in capital. Under certain circumstances described in the Certificate
of Designation for the RPS, additional shares of RPS may be issued in lieu of cash dividends.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The
RPS ranks senior to our common stock and pari passu with our Series A, and entitles its holders to a liquidation preference equal
to the stated value per share (i.e., $1,000) plus accrued but unpaid dividends. Holders of RPS may presently convert their RPS
into our common stock at a conversion price equal to the volume-weighted average price of our common stock for the 20 trading
days immediately prior to the date of conversion, subject to a minimum conversion price of $15.00 and in an aggregate amount limited
to 15% of the stated value of RPS originally purchased by such holder from us and still held by such holder.
Holders of RPS may request that we redeem their
RPS at a price equal to their stated value plus accrued but unpaid dividends, less an applicable redemption fee, if any. Nevertheless,
the Certificate of Designation for RPS permits us complete discretion to grant or decline redemption requests. Subject to certain
restrictions and conditions, we may also redeem shares of RPS without a redemption fee upon a holder’s death, total disability
or bankruptcy. In addition, after one year from the date of original issuance, we may, at our option, call and redeem shares of
RPS at a price equal to their liquidation preference.
As
of March 31, 2017, we had sold 87,131 shares of RPS for aggregate gross consideration of $87,131,000, and incurred
approximately $6,092,000 of selling costs related to the sale of those shares. Subsequent to March 31, 2017, we closed the
RPS offering to additional investors.
At
the time of its issuance, we determined that the RPS contained two embedded features: (1) optional redemption by the holder
and (2) optional conversion by the holder. We determined that each of the embedded features met the definition of a derivative
and that the RPS should be considered an equity host for the purposes of assessing the embedded derivatives for potential bifurcation.
Based on our assessment under ASC 470 “Debt” we do not believe bifurcation of either the holder’s redemption
or conversion feature is appropriate.
(11)
Series 2 Redeemable Preferred Stock
On
February 14, 2017, our public offering of up to 150,000 shares of Series 2 Redeemable Preferred Stock (“RPS 2”) at
$1,000 per share was declared effective. Holders of RPS 2 are entitled to cumulative dividends at the rate of 7% per annum, paid
monthly. Dividends on the RPS 2, when payable, will be recorded as a reduction to additional paid-in capital. Under certain circumstances
described in the Certificate of Designation for the RPS 2, additional shares of RPS 2 may be issued in lieu of cash dividends.
The
RPS 2 ranks senior to our common stock and pari passu with our Series A and RPS, and entitles its holders to a liquidation preference
equal to the stated value per share (i.e., $1,000) plus accrued but unpaid dividends. Holders of RPS 2 may, less an applicable
conversion discount, if any, convert their RPS 2 into our common stock at a conversion price equal to the volume-weighted average
price of our common stock for the 20 trading days immediately prior to the date of conversion, subject to a minimum conversion
price of $12.75 and in an aggregate amount limited to 10% of the stated value of RPS 2.
Holders of RPS 2 may request that we redeem
their RPS 2 shares at a price equal to their liquidation preference, less an applicable redemption fee, if any. Nevertheless, the
Certificate of Designation for RPS 2 permits us complete discretion to grant or decline requests for redemption. Subject to certain
restrictions and conditions, we may also redeem shares of RPS 2 without a redemption fee upon a holder’s death, total disability
or bankruptcy. In addition, we may, at our option, call and redeem shares of RPS 2 at a price equal to their liquidation preference
(subject to a minimum redemption price, in the event of redemptions occurring less than one year after issuance, of 107% of the
stated value of the shares being redeemed).
As
of March 31, 2017 we had not sold any shares of RPS 2.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(12)
Income Taxes
We
had a current income tax liability of $0 as of both March 31, 2017 and December 31, 2016. The components of deferred income tax
expense (benefit) for the three months ended March 31, 2017 and 2016, respectfully, consisted of the following:
|
|
Three Months Ended
|
|
|
|
March 31,
2017
|
|
|
March 31,
2016
|
|
Income tax:
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
27,000
|
|
|
$
|
23,000
|
|
State
|
|
|
7,500
|
|
|
|
6,000
|
|
Total current tax expense
|
|
|
34,500
|
|
|
|
29,000
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(20,000
|
)
|
|
$
|
806,000
|
|
State
|
|
|
(15,000
|
)
|
|
|
250,000
|
|
Total deferred tax expense (benefit)
|
|
|
(36,000
|
)
|
|
|
1,056,000
|
|
Total income tax expense (benefit)
|
|
$
|
(500
|
)
|
|
$
|
1,085,000
|
|
We
provide for a valuation allowance when it is not considered “more likely than not” that our deferred tax assets will
be realized. At both March 31, 2017 and December 31, 2016, based upon all available evidence, we provided a valuation allowance
of $2,164,000 against deferred tax assets related to the likelihood of recovering the tax benefit of a capital loss on a note
receivable from a related entity and other capital losses. Management believes all other deferred tax assets are recoverable.
ASC
740 requires the reporting of certain tax positions that do not meet a threshold of “more-likely-than-not” to be recorded
as uncertain tax benefits. It is management’s responsibility to determine whether it is “more-likely-than-not”
that a tax position will be sustained upon examination, including resolution of any related appeals or litigation, based upon
the technical merits of the position. Management has reviewed all income tax positions taken or expected to be taken for all open
years and determined that the income tax positions are appropriately stated and supported. We do not anticipate that the total
unrecognized tax benefits will significantly change prior to March 31, 2017.
Under
our accounting policies, interest and penalties on unrecognized tax benefits, as well as interest received from favorable tax
settlements, are recognized as components of income tax expense. At March 31, 2017 and December 31, 2016, we recorded no accrued
interest or penalties related to uncertain tax positions.
Our income tax returns for tax years ended
December 31, 2013, 2014, 2015 and 2016 remain open to examination by the Internal Revenue Service and various state taxing jurisdictions.
Our tax return for tax year 2012 has now been examined by the IRS (finalized April of 2015) but is open for examination by various
state taxing jurisdictions.
(13)
Common Stock
In
September 2014, we consummated an initial public offering of our common stock resulting in the sale of 800,000 shares of common
stock at $12.50 per share, and net proceeds of approximately $8.6 million after the payment of underwriting commissions, discounts
and expense reimbursements. In connection with this offering, we listed our common stock on the Nasdaq Capital Market under the
ticker symbol “GWGH.”
On February 16, 2017, GWG Holdings, Inc.
entered into a Separation Agreement with Mr. Paul Siegert. Under this agreement, Mr. Siegert retired and resigned his position
on our Board of Directors, including his role as Chairman of the Board. In addition, we agreed to and did repurchase in cash Mr.
Siegert’s 200,445 shares of GWG common stock at a negotiated price of $8 per share for an aggregate price of approximately
$1,604,000.
(14)
Stock Incentive Plan
We
adopted our 2013 Stock Incentive Plan in March 2013. The Compensation Committee of our Board of Directors is responsible for the
administration of the plan. Participants under the plan may be granted incentive stock options and non-statutory stock options;
stock appreciation rights; stock awards; restricted stock; restricted stock units; and performance shares. Eligible participants
include officers and employees of GWG Holdings and its subsidiaries, members of our Board of Directors, and consultants. As of
March 31, 2017, 2,000,000 common stock options are issuable under the plan.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Stock
Options
Through March 31, 2017, we had issued
stock options for 1,565,000 shares of common stock to employees, officers, and directors under the plan. Options for 753,000 shares
have vested, and the remaining options are scheduled to vest over three years. The options were issued with an exercise price
between $6.35 and $10.18 for those beneficially owning more than 10% of our common stock, and between $4.83 and $10.25 for all
others, which is equal to the estimated market price of the shares on the date of grant. The expected annualized volatility used
in the Black-Scholes model valuation of options issued during the period was 23.4%. The annual volatility rate is based on the
standard deviation of the average continuously compounded rate of return of five selected comparable companies over the previous
52 weeks. A forfeiture rate of 15% is based on historical information and expected future trend. As of March 31, 2017, stock options
for 480,000 shares had been forfeited and stock options for 28,000 shares had been exercised.
Outstanding
stock options:
|
|
Vested
|
|
|
Unvested
|
|
|
Total
|
|
Balance as of December 31, 2015
|
|
|
483,703
|
|
|
|
569,912
|
|
|
|
1,053,615
|
|
Granted during the year
|
|
|
22,500
|
|
|
|
608,350
|
|
|
|
630,850
|
|
Vested during the year
|
|
|
251,788
|
|
|
|
(251,788
|
)
|
|
|
-
|
|
Forfeited during the year
|
|
|
(19,926
|
)
|
|
|
(82,140
|
)
|
|
|
(102,066
|
)
|
Balance as of December 31, 2016
|
|
|
738,065
|
|
|
|
844,334
|
|
|
|
1,582,399
|
|
Granted during the quarter
|
|
|
17,100
|
|
|
|
7,800
|
|
|
|
24,900
|
|
Vested during the quarter
|
|
|
33,640
|
|
|
|
(33,640
|
)
|
|
|
-
|
|
Forfeited during the quarter
|
|
|
(36,119
|
)
|
|
|
(6,665
|
)
|
|
|
(42,784
|
)
|
Balance as of March 31, 2017
|
|
|
752,686
|
|
|
|
811,829
|
|
|
|
1,564,515
|
|
Compensation expense related to unvested options
not yet recognized is $512,000. We expect to recognize this compensation expense over the next three years ($251,000 in 2017, $158,000
in 2018, and $103,000 in 2019).
Stock
Appreciation Rights (SARs)
As of March 31, 2017, we have issued SARs
for 249,797 shares of common stock to employees. The strike price of the SARs was between $7.84 and $8.76, which was equal to
the market price of the common stock at the date of issuance. As of March 31, 2017, 107,857 of the SARs were vested. On March
31, 2017 the market price of GWG’s common stock was $11.10.
Outstanding
Stock Appreciation Rights:
|
|
Vested
|
|
|
Unvested
|
|
|
Total
|
|
Balance as of December 31, 2015
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Granted during the year
|
|
|
106,608
|
|
|
|
133,127
|
|
|
|
239,735
|
|
Forfeited during the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance as of December 31, 2016
|
|
|
106,608
|
|
|
|
133,127
|
|
|
|
239,735
|
|
Granted during the quarter
|
|
|
-
|
|
|
|
10,062
|
|
|
|
10,062
|
|
Vested during the quarter
|
|
|
1,249
|
|
|
|
(1,249
|
)
|
|
|
-
|
|
Balance as of March 31, 2017
|
|
|
107,857
|
|
|
|
141,940
|
|
|
|
249,797
|
|
A liability for the SARs was recorded
on March 31, 2017 in the amount of $294,000 and compensation expense was charged for the amount of $289,000. Our SARs entitle
the participant to a payment in cash.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(15)
Net income per common share
We have outstanding Series A and RPS, as
described in Notes 9 and 10. The Series A and RPS are anti-dilutive to our net loss or income attributable to common shareholders
calculation at both March 31, 2017 and 2016. We also issued warrants to purchase common stock in conjunction with the sale of Series
A (see Note 9). Both those warrants and our vested stock options are anti-dilutive at both March 31, 2017 and 2016 and have not
been included in the fully diluted net loss per common share calculation.
(16)
Commitments
We
are party to an office lease with U.S. Bank National Association as the landlord. On September 1, 2015, we entered into an amendment
to our original lease that expanded the leased space to 17,687 square feet and extended the term through 2026. Under the amended
lease we are obligated to pay base rent plus common area maintenance and a share of building operating costs. Rent expenses under
this agreement were $113,000 and $224,000 during the three months ended March 2017 and 2016, respectively.
Minimum lease payments under the amended
lease are as follows:
Nine months ending December 31, 2017
|
|
$
|
135,000
|
|
2018
|
|
|
185,000
|
|
2019
|
|
|
191,000
|
|
2020
|
|
|
198,000
|
|
2021
|
|
|
204,000
|
|
2022
|
|
|
210,000
|
|
2023
|
|
|
217,000
|
|
2024
|
|
|
223,000
|
|
2025
|
|
|
230,000
|
|
|
|
$
|
1,793,000
|
|
(17)
Contingencies
Litigation
– In the normal course of business, we are involved in various legal proceedings. In the opinion of management, any liability
resulting from such proceedings would not have a material adverse effect on our financial position, results of operations or cash
flows.
(18)
Guarantee of L Bonds
We
are publicly offering and selling L Bonds under a registration statement declared effective by the SEC, as described in Note 8.
Our obligations under the L Bonds are secured by substantially all the assets of GWG Holdings, a pledge of all our common stock
held individually by our largest stockholders, and by a guarantee and corresponding grant of a security interest in substantially
all the assets of GWG Life. As a guarantor, GWG Life has fully and unconditionally guaranteed the payment of principal and interest
on the L Bonds. Substantially all of our life insurance policies are held by DLP III, DLP IV and the Trust. The policies held
by DLP III and DLP IV are not collateral for the L Bond obligations as such policies serve as direct collateral for the senior
credit facilities.
The consolidating financial statements are presented
in lieu of separate financial statements and other related disclosures of the subsidiary guarantor and issuer because management
does not believe that separate financial statements and related disclosures would be material to investors. There are currently
no significant restrictions on the ability of GWG Holdings or GWG Life, the guarantor subsidiary, to obtain funds from its subsidiaries
by dividend or loan, except as described in these notes. A majority of insurance policies we own are subject to a collateral arrangement
with LNV Corporation described in Note 6. Under this arrangement, collection and escrow accounts are used to fund premiums for
the insurance policies and to pay interest and other charges under the senior credit facility.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The
following represents consolidating financial information as of March 31, 2017 and December 31, 2016, with respect to the financial
position, and as of March 31, 2017 and 2016, with respect to results of operations and cash flows of GWG Holdings and its subsidiaries.
The parent column presents the financial information of GWG Holdings, the primary obligor for the L Bonds. The guarantor subsidiary
column presents the financial information of GWG Life, the guarantor subsidiary of the L Bonds, presenting its investment in DLP
III, DLP IV and the Trust under the equity method. The non-guarantor subsidiaries column presents the financial information of
all non-guarantor subsidiaries, including DLP III, DLP IV and the Trust.
Condensed
Consolidating Balance Sheets
March 31, 2017
|
|
Parent
|
|
|
Guarantor Subsidiary
|
|
|
Non-Guarantor Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A S S E T S
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
46,110,677
|
|
|
$
|
2,851,438
|
|
|
$
|
971,221
|
|
|
$
|
-
|
|
|
$
|
49,933,336
|
|
Restricted cash
|
|
|
-
|
|
|
|
3,560,333
|
|
|
|
44,531,256
|
|
|
|
-
|
|
|
|
48,091,589
|
|
Investment in life insurance policies, at fair value
|
|
|
-
|
|
|
|
41,841,894
|
|
|
|
503,554,652
|
|
|
|
-
|
|
|
|
545,396,546
|
|
Secured MCA advances
|
|
|
-
|
|
|
|
-
|
|
|
|
5,005,400
|
|
|
|
-
|
|
|
|
5,005,400
|
|
Life insurance policy benefits receivable
|
|
|
-
|
|
|
|
600,000
|
|
|
|
8,375,000
|
|
|
|
-
|
|
|
|
8,975,000
|
|
Other assets
|
|
|
2,841,802
|
|
|
|
1,760,967
|
|
|
|
55,420
|
|
|
|
(1,340,497
|
)
|
|
|
3,317,692
|
|
Investment in subsidiaries
|
|
|
438,054,807
|
|
|
|
398,737,862
|
|
|
|
-
|
|
|
|
(836,792,669
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
487,007,286
|
|
|
$
|
449,352,494
|
|
|
$
|
562,492,949
|
|
|
$
|
(838,133,166
|
)
|
|
$
|
660,719,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
L I A B I L I T I E S & S T O C K H O L D E R S’ E Q U I T Y
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior credit facilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
153,387,813
|
|
|
$
|
-
|
|
|
$
|
153,387,813
|
|
Series I Secured Notes
|
|
|
-
|
|
|
|
11,000,368
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,000,368
|
|
L Bonds
|
|
|
383,315,514
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
383,315,514
|
|
Accounts payable
|
|
|
589,962
|
|
|
|
614,243
|
|
|
|
1,480,714
|
|
|
|
-
|
|
|
|
2,684,919
|
|
Interest and dividends payable
|
|
|
9,786,908
|
|
|
|
3,524,097
|
|
|
|
2,983,818
|
|
|
|
(6,905
|
)
|
|
|
16,287,918
|
|
Other accrued expenses
|
|
|
1,263,152
|
|
|
|
721,931
|
|
|
|
1,339,790
|
|
|
|
(1,333,592
|
)
|
|
|
1,991,281
|
|
Deferred taxes, net
|
|
|
2,096,871
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,096,871
|
|
TOTAL LIABILITIES
|
|
|
397,052,407
|
|
|
|
15,860,639
|
|
|
|
159,192,135
|
|
|
|
(1,340,497
|
)
|
|
|
570,764,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Member’s capital
|
|
|
-
|
|
|
|
433,491,855
|
|
|
|
403,300,814
|
|
|
|
(836,792,669
|
)
|
|
|
-
|
|
Convertible preferred stock
|
|
|
19,771,744
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19,771,744
|
|
Redeemable preferred stock
|
|
|
87,130,977
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
87,130,977
|
|
Common stock
|
|
|
5,780
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,780
|
|
Additional paid-in capital
|
|
|
1,908,774
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,908,774
|
|
Accumulated deficit
|
|
|
(18,862,396
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(18,862,396
|
)
|
TOTAL STOCKHOLDERS’ EQUITY
|
|
|
89,954,879
|
|
|
|
433,491,855
|
|
|
|
403,300,814
|
|
|
|
(836,792,669
|
)
|
|
|
89,954,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
487,007,286
|
|
|
$
|
449,352,494
|
|
|
$
|
562,492,949
|
|
|
$
|
(838,133,166
|
)
|
|
$
|
660,719,563
|
|
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Condensed Consolidating Balance Sheets (continued)
December 31, 2016
|
|
Parent
|
|
|
Guarantor Subsidiary
|
|
|
Non-Guarantor Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A S S E T S
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
28,481,047
|
|
|
$
|
49,360,952
|
|
|
$
|
644,983
|
|
|
$
|
-
|
|
|
$
|
78,486,982
|
|
Restricted cash
|
|
|
-
|
|
|
|
2,117,649
|
|
|
|
35,708,947
|
|
|
|
-
|
|
|
|
37,826,596
|
|
Investment in life insurance policies, at fair value
|
|
|
-
|
|
|
|
41,277,896
|
|
|
|
469,914,458
|
|
|
|
-
|
|
|
|
511,192,354
|
|
Secured MCA advances
|
|
|
-
|
|
|
|
-
|
|
|
|
5,703,147
|
|
|
|
-
|
|
|
|
5,703,147
|
|
Life insurance policy benefits receivable
|
|
|
-
|
|
|
|
-
|
|
|
|
5,345,000
|
|
|
|
-
|
|
|
|
5,345,000
|
|
Other assets
|
|
|
3,854,233
|
|
|
|
2,056,822
|
|
|
|
810,640
|
|
|
|
(2,033,592
|
)
|
|
|
4,688,103
|
|
Investment in subsidiaries
|
|
|
429,971,148
|
|
|
|
352,337,037
|
|
|
|
-
|
|
|
|
(782,308,185
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
462,306,428
|
|
|
$
|
447,150,356
|
|
|
$
|
518,127,175
|
|
|
$
|
(784,341,777
|
)
|
|
$
|
643,242,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
L I A B I L I T I E S & S T O C K H O L D E R S’ E Q U I T Y
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior credit facilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
156,064,818
|
|
|
$
|
-
|
|
|
$
|
156,064,818
|
|
Series I Secured Notes
|
|
|
-
|
|
|
|
16,404,836
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16,404,836
|
|
L Bonds
|
|
|
381,312,587
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
381,312,587
|
|
Accounts payable
|
|
|
853,470
|
|
|
|
731,697
|
|
|
|
641,545
|
|
|
|
-
|
|
|
|
2,226,712
|
|
Interest and dividends payable
|
|
|
9,882,133
|
|
|
|
3,743,277
|
|
|
|
2,535,189
|
|
|
|
-
|
|
|
|
16,160,599
|
|
Other accrued expenses
|
|
|
862,369
|
|
|
|
544,032
|
|
|
|
2,303,952
|
|
|
|
(2,033,592
|
)
|
|
|
1,676,761
|
|
Deferred taxes, net
|
|
|
2,097,371
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,097,371
|
|
TOTAL LIABILITIES
|
|
|
395,007,930
|
|
|
|
21,423,842
|
|
|
|
161,545,504
|
|
|
|
(2,033,592
|
)
|
|
|
575,943,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Member’s capital
|
|
|
-
|
|
|
|
425,726,514
|
|
|
|
356,581,671
|
|
|
|
(782,308,185
|
)
|
|
|
-
|
|
Convertible preferred stock
|
|
|
19,701,133
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19,701,133
|
|
Redeemable preferred stock
|
|
|
59,025,164
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
59,025,164
|
|
Common stock
|
|
|
5,980
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,980
|
|
Additional paid-in capital
|
|
|
7,383,515
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,383,515
|
|
Accumulated deficit
|
|
|
(18,817,294
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(18,817,294
|
)
|
TOTAL STOCKHOLDERS’ EQUITY
|
|
|
67,298,498
|
|
|
|
425,726,514
|
|
|
|
356,581,671
|
|
|
|
(782,308,185
|
)
|
|
|
67,298,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
462,306,428
|
|
|
$
|
447,150,356
|
|
|
$
|
518,127,175
|
|
|
$
|
(784,341,777
|
)
|
|
$
|
643,242,182
|
|
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Condensed Consolidating Statements of Operations
For the three months ended March 31, 2017
|
|
Parent
|
|
|
Guarantor Subsidiary
|
|
|
Non-Guarantor Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy servicing income
|
|
$
|
-
|
|
|
$
|
53,025
|
|
|
$
|
-
|
|
|
$
|
(53,025
|
)
|
|
$
|
-
|
|
Gain on life insurance policies, net
|
|
|
-
|
|
|
|
1,499,327
|
|
|
|
17,900,492
|
|
|
|
-
|
|
|
|
19,399,819
|
|
MCA income
|
|
|
-
|
|
|
|
-
|
|
|
|
246,577
|
|
|
|
-
|
|
|
|
246,577
|
|
Interest and other income
|
|
|
85,008
|
|
|
|
18,875
|
|
|
|
379,086
|
|
|
|
(41,020
|
)
|
|
|
441,949
|
|
TOTAL REVENUE
|
|
|
85,008
|
|
|
|
1,571,227
|
|
|
|
18,526,155
|
|
|
|
(94,045
|
)
|
|
|
20,088,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy servicing fees
|
|
|
-
|
|
|
|
-
|
|
|
|
53,025
|
|
|
|
(53,025
|
)
|
|
|
-
|
|
Interest expense
|
|
|
9,262,034
|
|
|
|
286,354
|
|
|
|
3,736,847
|
|
|
|
(41,020
|
)
|
|
|
13,244,215
|
|
Employee compensation and benefits
|
|
|
1,928,796
|
|
|
|
1,221,582
|
|
|
|
12,684
|
|
|
|
-
|
|
|
|
3,163,062
|
|
Legal and professional fees
|
|
|
492,816
|
|
|
|
261,087
|
|
|
|
192,445
|
|
|
|
-
|
|
|
|
946,348
|
|
Other expenses
|
|
|
1,663,002
|
|
|
|
882,731
|
|
|
|
234,589
|
|
|
|
-
|
|
|
|
2,780,322
|
|
TOTAL EXPENSES
|
|
|
13,346,648
|
|
|
|
2,651,754
|
|
|
|
4,229,590
|
|
|
|
(94,045
|
)
|
|
|
20,133,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE EQUITY IN INCOME OF SUBSIDIARIES
|
|
|
(13,261,640
|
)
|
|
|
(1,080,527
|
)
|
|
|
14,296,565
|
|
|
|
-
|
|
|
|
(45,602
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY IN INCOME OF SUBSIDIARIES
|
|
|
13,216,038
|
|
|
|
14,064,207
|
|
|
|
-
|
|
|
|
(27,280,245
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) BEFORE INCOME TAXES
|
|
|
(45,602
|
)
|
|
|
12,983,680
|
|
|
|
14,296,565
|
|
|
|
(27,280,245
|
)
|
|
|
(45,602
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX BENEFIT
|
|
|
(500
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(500
|
)
|
NET INCOME (LOSS)
|
|
|
(45,102
|
)
|
|
|
12,983,680
|
|
|
|
14,296,565
|
|
|
|
(27,280,245
|
)
|
|
|
(45,102
|
)
|
Preferred stock dividends
|
|
|
(1,867,760
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,867,760
|
)
|
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
|
|
$
|
(1,912,862
|
)
|
|
$
|
12,983,680
|
|
|
$
|
14,296,565
|
|
|
$
|
(27,280,245
|
)
|
|
$
|
(1,912,862
|
)
|
For the three months ended March 31, 2016
|
|
Parent
|
|
|
Guarantor Subsidiary
|
|
|
Non-Guarantor Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy servicing income
|
|
$
|
-
|
|
|
$
|
13,417
|
|
|
$
|
-
|
|
|
$
|
(13,417
|
)
|
|
$
|
-
|
|
Gain on life insurance policies, net
|
|
|
-
|
|
|
|
-
|
|
|
|
17,713,712
|
|
|
|
-
|
|
|
|
17,713,712
|
|
MCA income
|
|
|
-
|
|
|
|
-
|
|
|
|
144,961
|
|
|
|
-
|
|
|
|
144,961
|
|
Interest and other income
|
|
|
34,798
|
|
|
|
306
|
|
|
|
41,018
|
|
|
|
(30,902
|
)
|
|
|
45,220
|
|
TOTAL REVENUE
|
|
|
34,798
|
|
|
|
13,723
|
|
|
|
17,899,691
|
|
|
|
(44,319
|
)
|
|
|
17,903,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy servicing fees
|
|
|
-
|
|
|
|
-
|
|
|
|
13,417
|
|
|
|
(13,417
|
)
|
|
|
-
|
|
Interest expense
|
|
|
7,087,593
|
|
|
|
657,236
|
|
|
|
1,435,228
|
|
|
|
(30,902
|
)
|
|
|
9,149,155
|
|
Employee compensation and benefits
|
|
|
1,536,430
|
|
|
|
829,081
|
|
|
|
100,686
|
|
|
|
-
|
|
|
|
2,466,197
|
|
Legal and professional fees
|
|
|
594,739
|
|
|
|
534,650
|
|
|
|
76,739
|
|
|
|
-
|
|
|
|
1,206,128
|
|
Other expenses
|
|
|
1,257,977
|
|
|
|
968,674
|
|
|
|
185,509
|
|
|
|
-
|
|
|
|
2,412,160
|
|
TOTAL EXPENSES
|
|
|
10,476,739
|
|
|
|
2,989,641
|
|
|
|
1,811,579
|
|
|
|
(44,319
|
)
|
|
|
15,233,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE EQUITY IN INCOME OF SUBSIDIARIES
|
|
|
(10,441,941
|
)
|
|
|
(2,975,918
|
)
|
|
|
16,088,112
|
|
|
|
-
|
|
|
|
2,670,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY IN INCOME OF SUBSIDIARIES
|
|
|
13,112,194
|
|
|
|
16,301,366
|
|
|
|
-
|
|
|
|
(29,413,560
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME BEFORE INCOME TAXES
|
|
|
2,670,253
|
|
|
|
13,325,448
|
|
|
|
16,088,112
|
|
|
|
(29,413,560
|
)
|
|
|
2,670,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX EXPENSE
|
|
|
1,084,717
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,084,717
|
|
NET INCOME
|
|
|
1,585,536
|
|
|
|
13,325,448
|
|
|
|
16,088,112
|
|
|
|
(29,413,560
|
)
|
|
|
1,585,536
|
|
Preferred stock dividends
|
|
|
(511,231
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(511,231
|
)
|
NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS
|
|
$
|
1,074,305
|
|
|
$
|
13,325,448
|
|
|
$
|
16,088,112
|
|
|
$
|
(29,413,560
|
)
|
|
$
|
1,074,305
|
|
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Condensed Consolidating Statements of Cash Flows
For the three months ended March 31, 2017
|
|
Parent
|
|
|
Guarantor Subsidiary
|
|
|
Non-Guarantor Subsidiary
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(45,102
|
)
|
|
$
|
12,983,680
|
|
|
$
|
14,296,565
|
|
|
$
|
(27,280,245
|
)
|
|
$
|
(45,102
|
)
|
Adjustments to reconcile net income to net cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Equity) of subsidiaries
|
|
|
(13,216,038
|
)
|
|
|
(14,064,207
|
)
|
|
|
-
|
|
|
|
27,280,245
|
|
|
|
-
|
|
Change in fair value of life insurance policies
|
|
|
-
|
|
|
|
(1,059,422
|
)
|
|
|
(12,824,411
|
)
|
|
|
-
|
|
|
|
(13,883,833
|
)
|
Amortization of deferred financing and issuance costs
|
|
|
1,928,993
|
|
|
|
45,420
|
|
|
|
691,790
|
|
|
|
-
|
|
|
|
2,666,203
|
|
Deferred income taxes
|
|
|
(500
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(500
|
)
|
Preferred stock dividends payable
|
|
|
336,789
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
336,789
|
|
(Increase) decrease in operating assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance policy benefits receivable
|
|
|
-
|
|
|
|
(600,000
|
)
|
|
|
(3,030,000
|
)
|
|
|
-
|
|
|
|
(3,630,000
|
)
|
Other assets
|
|
|
5,507,945
|
|
|
|
(32,041,085
|
)
|
|
|
755,219
|
|
|
|
27,204,239
|
|
|
|
1,426,318
|
|
Increase (decrease) in operating liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to related party
|
|
|
691,865
|
|
|
|
320
|
|
|
|
(700,000
|
)
|
|
|
-
|
|
|
|
(7,815
|
)
|
Accounts payable and other accrued expenses
|
|
|
424,968
|
|
|
|
(158,732
|
)
|
|
|
950,996
|
|
|
|
-
|
|
|
|
1,217,232
|
|
NET CASH FLOWS USED IN OPERATING ACTIVITIES
|
|
|
(4,371,080
|
)
|
|
|
(34,894,026
|
)
|
|
|
140,159
|
|
|
|
27,204,239
|
|
|
|
(11,920,708
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in life insurance policies
|
|
|
-
|
|
|
|
-
|
|
|
|
(22,689,333
|
)
|
|
|
-
|
|
|
|
(22,689,333
|
)
|
Carrying value of matured life insurance policies
|
|
|
-
|
|
|
|
495,424
|
|
|
|
1,873,550
|
|
|
|
-
|
|
|
|
2,368,974
|
|
Proceeds from Secured MCA advances
|
|
|
|
|
|
|
-
|
|
|
|
770,387
|
|
|
|
-
|
|
|
|
770,0387
|
|
NET CASH FLOWS USED IN INVESTING ACTIVITIES
|
|
|
-
|
|
|
|
495,424
|
|
|
|
(20,045,396
|
)
|
|
|
-
|
|
|
|
(19,549,972
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net repayments of senior credit facilities
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,368,794
|
)
|
|
|
-
|
|
|
|
(3,368,794
|
)
|
Payments for redemption of Series I Secured Notes
|
|
|
-
|
|
|
|
(5,449,889
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,449,889
|
)
|
Proceeds from issuance of L Bonds
|
|
|
24,868,659
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
24,868,659
|
|
Payment for redemption and issuance of L Bonds
|
|
|
(24,171,597
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(24,171,597
|
)
|
Payments to
restricted cash
|
|
|
-
|
|
|
|
(1,442,684
|
)
|
|
|
(8,822,309
|
)
|
|
|
-
|
|
|
|
(10,264,993
|
)
|
Repurchase of common stock
|
|
|
(1,603,560
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,603,560
|
)
|
Proceeds from issuance of preferred stock
|
|
|
27,179,194
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
27,179,194
|
|
Payments for issuance and redemption of preferred stock
|
|
|
(2,404,226
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,404,226
|
)
|
Payments of preferred stock dividends
|
|
|
(1,867,760
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,867,760
|
)
|
Issuance of member capital
|
|
|
-
|
|
|
|
(5,218,339
|
)
|
|
|
32,422,578
|
|
|
|
(27,204,239
|
)
|
|
|
-
|
|
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
|
|
|
22,000,710
|
|
|
|
(12,110,912
|
)
|
|
|
20,231,475
|
|
|
|
(27,204,239
|
)
|
|
|
2,917,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
17,629,630
|
|
|
|
(46,509,514
|
)
|
|
|
326,238
|
|
|
|
-
|
|
|
|
(28,553,646
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BEGINNING OF THE PERIOD
|
|
|
28,481,047
|
|
|
|
49,360,952
|
|
|
|
644,983
|
|
|
|
-
|
|
|
|
78,486,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
END OF THE PERIOD
|
|
$
|
46,110,677
|
|
|
$
|
2,851,438
|
|
|
$
|
971,221
|
|
|
$
|
-
|
|
|
$
|
49,933,336
|
|
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Consolidating Statements of Cash Flows (continued)
For the three months ended March 31, 2016
|
|
Parent
|
|
|
Guarantor Subsidiary
|
|
|
Non-Guarantor Subsidiary
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,585,536
|
|
|
$
|
13,325,448
|
|
|
$
|
16,088,112
|
|
|
$
|
(29,413,560
|
)
|
|
$
|
1,585,536
|
|
Adjustments to reconcile net income to net cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Equity) of subsidiaries
|
|
|
(13,112,194
|
)
|
|
|
(16,301,366
|
)
|
|
|
-
|
|
|
|
29,413,560
|
|
|
|
-
|
|
Change in fair value of life insurance policies
|
|
|
-
|
|
|
|
-
|
|
|
|
(11,531,553
|
)
|
|
|
-
|
|
|
|
(11,531,553
|
)
|
Amortization of deferred financing and issuance costs
|
|
|
1,648,891
|
|
|
|
(1,164,206
|
)
|
|
|
299,503
|
|
|
|
-
|
|
|
|
784,188
|
|
Deferred income taxes
|
|
|
1,055,729
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,055,729
|
|
Preferred stock dividends payable
|
|
|
163,577
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
163,577
|
|
(Increase) decrease in operating assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance policy benefits receivable
|
|
|
-
|
|
|
|
-
|
|
|
|
(15,912,839
|
)
|
|
|
-
|
|
|
|
(15,912,839
|
)
|
Other assets
|
|
|
(38,661,205
|
)
|
|
|
(24,992,068
|
)
|
|
|
-
|
|
|
|
63,826,699
|
|
|
|
173,426
|
|
Increase (decrease) in operating liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to related party
|
|
|
(2,731,001
|
)
|
|
|
(16,607
|
)
|
|
|
4,460,000
|
|
|
|
-
|
|
|
|
1,712,392
|
|
Accounts payable and other accrued expenses
|
|
|
782,047
|
|
|
|
586,702
|
|
|
|
599,220
|
|
|
|
-
|
|
|
|
1,967,969
|
|
NET CASH FLOWS USED IN OPERATING ACTIVITIES
|
|
|
(49,268,620
|
)
|
|
|
(28,562,097
|
)
|
|
|
(5,997,557
|
)
|
|
|
63,826,699
|
|
|
|
(20,001,575
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in life insurance policies
|
|
|
-
|
|
|
|
-
|
|
|
|
(24,326,322
|
)
|
|
|
-
|
|
|
|
(24,326,322
|
)
|
Carrying value of matured life insurance policies
|
|
|
-
|
|
|
|
-
|
|
|
|
4,610,479
|
|
|
|
-
|
|
|
|
4,610,479
|
|
Investments in Secured MCA advances
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,353,585
|
)
|
|
|
-
|
|
|
|
(4,353,585
|
)
|
Proceeds from Secured MCA advances
|
|
|
|
|
|
|
-
|
|
|
|
118,143
|
|
|
|
-
|
|
|
|
118,143
|
|
NET CASH FLOWS USED IN INVESTING ACTIVITIES
|
|
|
-
|
|
|
|
-
|
|
|
|
(23,951,285
|
)
|
|
|
-
|
|
|
|
(23,951,285
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net borrowings on senior credit facilities
|
|
|
-
|
|
|
|
-
|
|
|
|
20,000,000
|
|
|
|
-
|
|
|
|
20,000,000
|
|
Payments for redemption of Series I Secured Notes
|
|
|
-
|
|
|
|
(5,237,393
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,237,393
|
)
|
Proceeds from issuance of L Bonds
|
|
|
34,368,889
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
34,368,889
|
|
Payment issuance and redemption of L Bonds
|
|
|
(10,909,693
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(10,909,693
|
)
|
Payments to restricted cash
|
|
|
-
|
|
|
|
(2,705,379
|
)
|
|
|
(14,781,341
|
)
|
|
|
-
|
|
|
|
(17,486,720
|
)
|
Issuance of common stock
|
|
|
46,545
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
46,545
|
|
Proceeds from issuance of preferred stock
|
|
|
1,028,536
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,028,536
|
|
Payments for issuance and redemption of preferred stock
|
|
|
(772,553
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(772,553
|
)
|
Payments of preferred stock dividends
|
|
|
(511,231
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(511,231
|
)
|
Issuance of member capital
|
|
|
-
|
|
|
|
38,862,512
|
|
|
|
24,964,187
|
|
|
|
(63,826,699
|
)
|
|
|
-
|
|
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
|
|
|
23,250,493
|
|
|
|
30,919,740
|
|
|
|
30,182,846
|
|
|
|
(63,826,699
|
)
|
|
|
20,526,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
(26,018,127
|
)
|
|
|
2,357,643
|
|
|
|
234,004
|
|
|
|
-
|
|
|
|
(23,426,480
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BEGINNING OF THE PERIOD
|
|
|
32,292,162
|
|
|
|
1,982,722
|
|
|
|
150,221
|
|
|
|
-
|
|
|
|
34,425,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
END OF THE PERIOD
|
|
$
|
6,274,035
|
|
|
$
|
4,340,365
|
|
|
$
|
384,225
|
|
|
$
|
-
|
|
|
$
|
10,998,625
|
|
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(19) Concentration
We purchase life insurance policies written by life
insurance companies having investment-grade ratings by independent rating agencies. As a result, there may be certain concentrations
of policies with life insurance companies. The following summarizes the face value of insurance policies with specific life insurance
companies exceeding 10% of the total face value of our portfolio.
|
|
March 31,
|
|
|
December 31,
|
|
Life insurance company
|
|
2017
|
|
|
2016
|
|
John Hancock
|
|
|
14.68
|
%
|
|
|
14.36
|
%
|
AXA Equitable
|
|
|
12.96
|
%
|
|
|
13.42
|
%
|
Lincoln National
|
|
|
11.43
|
%
|
|
|
11.22
|
%
|
Transamerica
|
|
|
10.11
|
%
|
|
|
*
|
|
* percentage does not exceed 10% of the total face value.
The following summarizes the number of insurance policies
held in specific states exceeding 10% of the total face value held by us:
|
|
March 31,
|
|
|
December 31,
|
|
State of residence
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
California
|
|
|
20.05
|
%
|
|
|
20.72
|
%
|
Florida
|
|
|
19.92
|
%
|
|
|
19.42
|
%
|
(20) Subsequent Events
Subsequent to March 31, 2017, we
have issued approximately an additional $9,817,000 in principal amount of L Bonds.
Subsequent to March 31, 2017 we
have issued approximately $11,691,000 of RPS. Our RPS offering was sold out subsequent to March 31, 2017.
Subsequent to March 31, 2017 we
have issued approximately $7,359,000 of RPS 2.
On April 17, 2017, Jon Gangelhoff,
Chief Operating Officer, voluntarily resigned. As a separation payment, Mr. Gangelhoff will continue to receive his regular salary
payments (annualized to approximately $250,000) through April 2018. All of Mr. Gangelhoff’s unvested outstanding common stock
options at the time of his separation were vested under the separation agreement.
On April 17, 2017, we announced
the voluntary resignation of Michael Freedman, President, which will be effective May 15, 2017. As a separation payment, Mr. Freedman
will receive compensation through the term of his Employment Agreement ending September 22, 2017 (aggregating to $258,000). Mr.
Freedman will surrender all of his vested and unvested options to purchase our common stock.
Subsequent to March 31, 2017 an
additional 27,000 of stock options were exercised.
On April 26, 2017, we entered into
an exclusive license for the “DNA Methylation Based Predictor of Mortality” technology from the University of California,
Los Angeles (“UCLA”), for application within the life insurance and related industries.
On May 5, 2017, our stockholders
approved a 1,000,000-share increase in the number of shares of common stock reserved and available for issuance under our 2013
Stock Incentive Plan. As a result, an aggregate of 3,000,000 shares of common stock are now reserved and available for issuance
under that plan.